Common sense for individual investors

A Wealth of Common Sense: Why Simplicity Trumps Complexity In Any Investment Plan. By Ben Carlson. Bloomberg Press/Wiley. 224 pp.

The individual investor has to be somewhat unsettled these days. Prior to the recent downturn in the equity markets, both stock and bond indices have fluctuated with sometimes wild abandon, which has probably made even the most seasoned investor a bit squeamish.

I know I have at times just felt like screaming, “Why can’t we all just get along?” as seasons of volatility alternate with weeks of calm.

What the markets need is common sense. A good source of just that is available in Ben Carlson’s A Wealth of Common Sense: Why Simplicity Trumps Complexity In Any Investment Plan.

Carlson, an institutional portfolios manager, regularly offers doses of common sense on his blog “A Wealth of Common Sense.”

One of the key sentences I found in the book says: “Volatility can be both a risk and an opportunity, depending on how you react to market fluctuations.”

Carlson’s book provides much solid information just like that.

Beginning with the basics

Carlson gets the reader down to the basics of investing and that’s a very good place to start. A history lesson is provided on the relationship of institutional versus individual investors in the first chapter. Quickly it becomes evident that the individual, while in the minority in market weight, can still receive a nice benefit for participating.

Any gain will come through learning from the experienced, according to Carlson:

“One of the biggest problems for individual investors just starting out is that they try to pursue the grail of earning higher returns with lower risks without the proper understanding of how hard it truly is to obtain. They assume that they need to use the most sophisticated investment strategies to succeed in the markets. On the flipside of that coin, those that are on top of their game and have used the most complex approaches always seem to offer simple solutions to the individual investors.”

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In essence, the individual needs to accept the point that simple solutions do work and many times work quite nicely.

Understandng investment risk

A key deterrent of many would-be investors is the risk involved. There is a chapter on risk that takes the topic on and clarifies the issue. The chapter quotes Warren Buffet’s two simple rules of investing as “Rule Number 1: Never lose money. Rule Number 2: Never forget rule number one.”

While we know this is desirable but impossible, the chapter continues with a chart of Buffet’s stock losses, and the admonition that knowledge of the types of risk we face in the financial markets is a key to being successful. The chapter provides an understandable explanation of market and portfolio risk and a very straightforward two-question risk questionnaire. It is a common sense approach.

Sorting reality from modern mythology

One of the chapters that I really appreciated is entitled “Market Myths and Market History.” In the banter tossed about in today’s many kinds of media, we have truths, half-truths, and many errors. Frequently it is clear that the media is trying to sell itself rather than service to investors, so a chapter written on market myth is a breath of fresh air.

Once an investor understands these myths, good decisions can follow. The 14 myths covered include being able to time the markets; knowing when the next crash is coming; and treating one’s home as an investment. A number of the myths covered include aspects of investment risks, such as #13: “Investing in the stock markets is like gambling in a casino.”

Another area of real interest for me was Carlson’s narrative on asset allocation. I agree with the author that this is by far the most important decision made when creating a portfolio. The hot tips; moving in and out of investments; and concentrations in an investment type make the news and the banter in the office break rooms—but asset allocation with a good douse of diversification is the foundation of a sound investment plan.

Getting investment advice

Investors looking for help with their portfolio need to focus on the chapter called “Financial Professionals.” This chapter was very informative on the industry of which I am a part, as a trust banker. I appreciated the author’s candor about providers and his suggested processes on finding a good advisor and maintaining the relationship. Having a lot of experience in the field over the years, I valued the paragraphs on “how to be a good client.”

Overall, I found that Carlson was able to share a lot of valuable information in a style that was instructive and informative without a personal agenda getting in the way.

In contrast, I had previously read a book entitled Wall Street’s Just Not That Into You: An Insider’s Guide To Protecting And Growing Wealth, which was giving out market information with a slant to gain the reader as a client. A Wealth of Common Sense rewards the reader with solid and trustworthy information that can benefit any investor.

Each chapter has a summary at its end that provides some key takeaways. These bullet points were a good source of review. The conclusion of the book ties everything together with action steps. That’s an excellent final touch on a book that is extremely instructive and potentially beneficial to many.